Tuesday, March 17, 2015

It's okay to say anything at all about a graph, I guess

Charles Hugh Smith offers The One Chart You Need to Predict the Future. He begins by stating the idea we are supposed to take from his post:

We are witnessing a profound secular sea-change: the failure of expanding debt and leverage to lift the real economy of wages and household income.

If I wrote that, it would be more like this:

Debt no longer boosts income.

No "profound secular sea-change". No "witnessing". Not even a "we". And no "failure to lift the real economy".

No flowers. No hats. No photographs of self playing a guitar in Neverland... And no 316 Members either, I guess.

So it goes.

We are witnessing a profound secular sea-change: the failure of expanding debt and leverage to lift the real economy of wages and household income.

Everybody knows we have too much debt, and everybody knows we don't have enough household income. So right off the bat everybody agrees with Charles Huge Smith. He even got me with that, the first time I read it.

After that topic sentence or theme sentence or whatever it is, Charles gets down to business:

When push comes to shove, you only need one chart to predict the future: debt and wages ( credit and compensation).

The bold is his.

I would point out, though, that debt is not the same as credit. Nor is wages the same as compensation. You know damn well when somebody shows a graph of wages falling behind productivity, somebody else will show a graph of compensation keeping up with productivity. Nonetheless, Charles Hugh Smith seems to think he needs to explain to us that "wages" means "compensation". It's crappy writing thinking, really.

Chuck continues:

This chart displays debt and wages as a ratio: debt/wages. What it reveals is the endgame of financialization: creating more debt no longer pushes wages higher.
That brings us back to his opening thought.

Now he shows the chart graph chart:

Chuckie's graph runs flat or uphill from 1960 to that godawful peak in 2009. Downhill thereafter. But it doesn't show what he says it shows. Not even close.

The graph shows debt relative to wages: debt divided by wages. The more the debt, the higher the line goes. The more the wages, the lower the line goes.

From 1960 to 2009, when the line goes up, the graph shows that debt was increasing faster than wages. Since 2009, where the line goes down, it shows that wages were increasing faster than debt. So when Charles Hugh Smith points to the years since 2009 on the graph and describes it as

diminishing returns on additional debt -- more debt no longer pushes wages higher

well, he has it exactly wrong. The line is going down since 2009. That means wages have been increasing faster than debt since 2009.

Worst case, wages are decreasing more slowly than debt. We cannot tell from the graph if wages are increasing or decreasing, because the graph shows a ratio. It does not show wages, and it does not show debt. It shows the relation between debt and wages. We can not know from the graph whether debt ever pushed wages higher. It's a boldly false assumption to claim that it has. No wonder Charles Hugh Smith follows his post with his standard disclaimer:

The owner of this blog makes no representations as to the accuracy or completeness of any information on this site

For more, see my comment at the Reddit link.


Jazzbumpa said...

That ol' devil denominator.


The Arthurian said...

> That ol' devil denominator.

There ya go.